Pluralistic: 04 May 2021

Today's links

The facade of Hometown Deli with 'Hometown' replaced with the Duke University wordmark, and the Duke shield and Devils logo on its facade.

Whales decry the casino economy (permalink)

Remember Hometown Deli? It's the squat cinderblock New Jersey sandwich shop that is publicly traded and raised $2.5m on a $100m valuation, based on $35k in annual revenue. It was the source of much puzzlement and mirth last month.

Since then, there's been a lot of financial sleuthing to figure out what this "company" is – the smart money is that it's a prepackaged financial vehicle to allow an otherwise unmarketable offshore company to go public, by doing a reverse-acquisition.

A reason for all this attention is that Hometown is a perfect emblem of the casino economy, in which the financial sector makes vast fortunes without producing anything of value, simply by making bets, including bets on other bets (which are sometimes also bets on bets).

The stories about the casino are often about the way that unwise retail investors are wasting their "stimmies" by being the sucker at the poker-table, getting fleeced by the sharp operators who know how the game is really played.

That's how things played out at the Berkshire Hathaway annual meeting, where Warren Buffett and Charlie Munger (the only billionaire power-couple that isn't getting a divorce) scolded the Wallstreetbets/Gamestop speculators and their abettors:

But as David Dayen points out, the action from retail investors is just a side-show. Take SPACs – a form of corporation-launder that allows companies with unsound financial to go public without normal scrutiny.

The majority of SPACs did not originate through celebrity endorsers – they were high-flying finance vehicles created by major investment banks and funds.

Even the Gamestop bull run – this year's poster child for retail investors moving markets – was mostly a wargame waged by titanic funds, with retail investors providing protective coloration.

The Trump stimulus included a promise government to buy up as many junk-bonds as the corporate sector could issue, pumping trillions into the casino economy (cities and states, meanwhile, were hung out to dry, left to fire teachers and firefighters):

All of that money has gone to socially destructive activity, including the bull run on single-family dwellings, which Wall St is trying to corner the market on so that everyone will pay rent to a finance slumlord so their shelter can securitized into bonds.

Much of the money has been poured into anticompetitive mergers, as companies seek to own their own markets (horizontal mergers) and their supply chains (vertical mergers), and so far, the Biden admin has given them all a pass:

Thanks to the fed's "we'll buy your junk bond" policy, these mergers are largely debt-financed, leaving once-healthy businesses saddled with vast amounts of debt that put their employees, customers and suppliers at risk of collapse.

That's the real story behind the failed EU football "Superleague," in which a dozen teams proposed to take over all of EU football so that their debt-saddled owners could continue to make the interest payments on the fortunes they extracted from them.

Football fans know this, of course. That's why #ManU fans stormed the pitch and set off smoke-bombs to protest the team's debt-based takeover by the US billionaire/speculator Glazer family.

(Incidentally, the best commentary on Superleague has come from Musa Okwonga, whose Trashfuture episode on the teams' dodgy, ruinious finances is an absolute must-listen)

Despite Buffett's finger-wagging, the casino economy is being run by whales, not minnows. Even Hometown Deli, which looks more like a mob money-laundry than a high-finance gambit, was built on the fortunes of sophisticated, blue-chip investors.

Out of the $2.5m that Hometown Deli raked in from "investment" last year, $2m came from Duke University and Vanderbilt University, who invested through their multibillion-dollar endowments.

The fact that America's elite universities are now just "hedge funds with educational arms" is a leading indicator of the financial rot's spread through the system.

The same economists who brief against the elements of the Biden stimulus that will create structural changes in jobs, climate resilience, energy independence and food stability have no problem with this casino economy.

The only part they decry is the spectacle of the suckers at the table, because whether they're getting fleeced or collecting a rare jackpot, they bring the whole enterprise into disrepute.

A powdery residue on a lab-slide.

Qualia (permalink)

My latest Locus Magazine column is "Qualia," and it argues that every attempt to make an empirical, quantitative cost-benefit analysis involves making subjective qualitative judgments about what to do with all the nonquantifiable elements of the problem.

Think of contact tracing. When an epidemiologist does contact tracing, they establish personal trust with infected people and use that relationship to unpick the web of social and microbial ties that bind them to their community.

But we don't know how to automate that person-to-person process, so we do what quants have done since time immemorial: we decide that the qualitative elements of the exercise can be safely incinerated, so we can do math on the quantitative residue that's left behind.

We can automate measurements of signal strength and contact duration. We can do math on those measurements.

What we can't do is tell whether you had "contact" with someone in the next sealed automobile in slow traffic – or whether you were breathing into each others' faces.

The decision to discard the subjective is subjective.

When the University of Illinois hired physicists to design its re-opening model, they promised no more than 100 cases in the semester and made unkind remarks about how easy epidemiology was compared to physics.

Within weeks, the campus shut down amid a 780-person outbreak. The physicists' subjective judgment that their model didn't need to factor in student eyeball-licking parties meant that the model could not predict the reality.

The problems in quants' claims of empiricism aren't just that they get it wrong – it's that they get it wrong, and then claim that it's impossible for anyone to do better.

This is – in Patrick Ball's term – "empirical facewash." Predictive policing apps don't predict where crime will be, but they DO predict where police will look for criminals.

Subjectively discarding the distinction between "arrests" and "crime" makes bias seem objective.

40 years ago, the University of Chicago's Economics Department incubated a radical experiment in false empiricism: the "Law and Economics" movement, which has ruled out legal and political sphere since Reagan.

Law and Econ's premise was that "equality before the law" required that the law be purged of subjective assessments. For example, DoJ review of two similar mergers should result in two similar outcomes – not approval for one and denial for the other.

To this end, they set out to transform the standards for anti-monopoly enforcement from a political judgment ("Will this merger make a company too powerful?") to an economic one ("Will this merger make prices go up?").

It's true that "Is this company too powerful?" is a subjective question – but so is "Will this merger result in higher prices?"

After all, every company that ever raised prices after a merger blamed something else: higher wage- or material-costs, energy prices, etc.

So whenever two companies merge and promise not to raise prices, we have to make a subjective judgment as to whether to trust them. And if they do merge and raise prices, we have to subjectively decide whether they're telling the truth about why the prices went up.

Law and Econ's answer to this lay in its use of incredibly complex mathematical models. Chicago economists were the world's leading experts in these models, the only people who claimed to know how to make and interpret them.

It's quite a coincidence how every time a company hired a Chicago Boy to build a model to predict how a merger would affect consumers, the model predicted it would be great.

A maxim of neoliberal economics is "incentives matter" – and economists have experience to prove it.

The Chicago School became a sorcerous priesthood, its models the sacrificial ox that could be ritually slaughtered so the future could be read in its guts. Their primacy in models meant that they could dismiss anyone who objected as an unqualified dilettante.

And if you had the audacity to insist that the law shouldn't limit itself to these "empirical" questions, they'd say you were "politicizing" the law, demolishing "equality before the law" by making its judgements dependent on subjective evaluations rather than math.

That's how we got into this mess, with two beer companies, two spirits companies, three record companies, five tech companies, one eyeglasses company, one wrestling league, four big accounting firms – they merged and merged, and the models said it would be fine, just fine.

These companies are too powerful. Boeing used its power to eliminate independent oversight of its 737 Max and made flying death-traps, and then got tens of billions in bailouts to keep them flying.

What's more, these companies are raising prices, no matter what the model says. The FTC knows how to clobber two companies that get together to make prices higher, but if those companies merge and the two resulting divisions do the same thing, they get away with it.

The only "price-fixing" the FTC and DoJ know how to detect and stop is the action of misclassified gig-economy workers (who are allegedly each an independent business) who get together to demand a living wage. In Law-and-Econ terms, that's a cartel engaged in price-fixing.

That means Lyft and Uber can collude to spend $200m to pass California's Prop 22, so they can pretend their employees are contractors and steal their wages and deny them workplace protection – but if the workers go on strike, they're the monopolists.

In Law-and-Econ land, the way those thousands of precarious, overstretched workers should resist their well-capitalised bosses at Uber and Lyft is to form a trade association, raise $200m of their own, and pass their own ballot initiative.

As I wrote in the column: "Discarding the qualitative is a qualitative act. Not all incinerators are created equal: the way you produce your dubious quantitative residue is a choice, a decision, not an equation."

There is room for empiricism in policy-making, of course. When David Nutt was UK Drugs Czar, he had a panel of experts create empirical rankings for how dangerous different drugs were to their users, their families and wider society.

From this, he was able to group drugs into "drugs whose regulation would change a lot based on how you prioritized these harms" and "drugs whose ranking remains stable, no matter what your priorities."

Nutt was then able to go to Parliament and say, "OK, the choice about who we protect is a political, subjective one, not an empirical one. But once you tell me what your subjective choice is, I can empirically tell you how to regulate different drugs."

Nutt isn't UK Drugs Czar anymore. He was fired after he refused to recant remarks that alcohol and tobacco were more dangerous than many banned substances. He was fired by a government that sat back and watched as the booze industry concentrated into four companies.

These companies' profits are wholly dependent on dangerous binge drinking; they admit that if Britons were to stop binge drinking, they'd face steep declines in profitability.

These companies insist they can prevent binge drinking, through "enjoy responsibly" programs.

These programs are empirical failures. The companies insist that this is because it's impossible to prevent binge drinking.

So Nutt made his own program, and performed randomized trials to see how it stacked up against the booze pushers' version.

Nutt's program worked.

It was never implemented.

Instead, he got fired, for saying – truthfully – that alcohol is an incredibly dangerous drug.

The four companies that control the world's booze industry have enormous political power.

So here we have the failure of Law-and-Econ, even on its own terms. Instead of creating an empirical basis for policy, the Law-and-Econ framework has created global monopolies that capture their regulators and kill with impunity.

That's why it's so significant that Amy Klobuchar's antitrust proposals start by getting rid of the "consumer welfare" standard and replacing it with a broader standard: "Is this company too powerful?"

(Image: OpenStax Chemistry, CC BY)

This day in history (permalink)

#20yrsago Linus Torvalds responds to Craig Mundie on open source

#15yrsago Danny Hillis on how games are(n’t) like a theme park

#10yrsago Minnesota GOP leader declares war on Neil Gaiman

#10yrsago Rental laptops equipped with spyware that can covertly activate the webcam and take screenshots

#10yrsago John Ashcroft assumes charge of “ethics and professionalism” for Blackwater

#5yrsago The Planet Remade: frank, clear-eyed book on geoengineering, climate disaster, & humanity’s future

#5yrsago US government and SCOTUS change cybercrime rules to let cops hack victims’ computers

#5yrsago Chinese censorship: arbitrary rule changes are a form of powerful intermittent reinforcement

#5yrsago After advertiser complaints, Farm News fires editorial cartoonist who criticized John Deere & Monsanto

#1yrago XML inventor quits Amazon over whistleblower firings

#1yrago The failure of software licensing

#1yrago Pandemic could make Big Tech our permanent overlords

#1yrago Hospital CEOs making millions amid cuts

Colophon (permalink)

Today's top sources: Naked Capitalism (

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